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Economy

New Zealand central bank unveils new lending tool

Benchmark held at record low as negative rates remain on horizon

A security guard stands outside the main entrance to the Reserve Bank of New Zealand in Wellington.   © Reuters

WELLINGTON (Reuters) -- New Zealand's central bank on Wednesday unveiled a new monetary policy tool that will reduce borrowing costs for lenders, while holding the benchmark rate at a record low and signalling its readiness to deploy negative rates.

The Reserve Bank of New Zealand (RBNZ) held the official cash rate (OCR) at 0.25% at a monetary policy meeting and left its quantitative easing programme unchanged, as expected in a Reuters poll.

"The Monetary Policy Committee agreed to provide additional monetary stimulus to the economy in order to meet its consumer price inflation and employment remit," RBNZ said in a post-meeting statement.

RBNZ said additional stimulus would be provided through a new funding-for-lending programme (FLP) that will commence in December, which would reduce banks' funding costs and lower interest rates.

It said progress has been made on the bank's operational ability to deploy FLP and a negative OCR. The RBNZ's monetary policy committee agreed they will be mutually supportive in bolstering economic activity if necessary.

Markets are on the lookout for any clues on RBNZ's move to zero rates or a negative OCR, although stronger than expected data has given the RBNZ room to stick to its guidance of not lowering rates until March next year.

New Zealand reported an unemployment rate of 5.3% last week, well short of RBNZ's forecast of 7%. Its success in containing the community spread of COVID-19 has allowed the economy to bounce back faster than most other countries.

But with more job losses expected in coming quarters, inflation weak and the economy in a deep recession, the RBNZ is expected continue its monetary support.

The New Zealand dollar dipped about 17 pips right after the statement but recovered moments later to hold steady around $0.6830.

"Their unconstrained OCR track has been revised higher, so less negative but still negative," said Jason Wong, senior markets strategist at BNZ.

"They're not overcommitting future policy, but keeping the market guessing as to whether or not they'll go negative next year."

Separately on Wednesday, the RBNZ delayed plans to hike bank capital requirements by a year and also said it was reviewing mortgage lending rules.

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